After a summer spent cleaning house in the executive suite under the watchful eye of regulators, it seems that PNC Financial Services Group Inc. may now be ready to examine its business lines.
The Pittsburgh company is said to be considering several options for BillingZone, a two-and-a-half-year-old online bill payment joint venture it formed with Perot Systems of Plano, Tex. It is unclear which way the company is leaning, but those options are said to include selling some or all of its 50% stake. The company may also seek to bring new partners into the venture.
BillingZone sells technology for electronic invoice payment and presentment, or EIPP. Its more than two dozen clients include ABN Amro North America Inc., KeyBank, Diebold Inc., Procter & Gamble Inc., and Xerox Corp. Some have estimated the EIPP market to be more than $72 billion by next year.
PNC has participated in two rounds of funding for the joint venture, when it was formed in March 2000 and again last February. Details of the funding were not released.
A spokesman for PNC said it has a long-standing policy of not discussing market rumors.
PNC has just completed a several-month regulatory review of its management, having run afoul of regulators earlier this year over accounting for special-purpose vehicles that moved loans off its balance sheet. The changes in the executive suite and on the board appear seem complete, and a team of consultants delivered a report to the board last week.
BillingZone is still a young business for PNC and has a small client list. But if it takes off among corporate customers, it would be tapping into an enormous market.
A Federal Reserve study done in late 2001 concluded that nearly 50 billion checks a year, worth more than $47 trillion, are written in the United States. Businesses are the dominant writers and receivers of those checks; more than 42% of the value of their written checks goes to other businesses.
Those checks are expected to go digital in a big way. Gartner Inc., the research firm in Stamford, Conn., estimates that 60% of invoices will be sent electronically by 2005.
On Tuesday executives at the joint venture said that from January through August it doubled its roster of Fortune 500 clients and the number of transactions processed and increased the dollar amount in its systems by 500%.
BillingZone also recently made Forbes' Best of the Web list, joining Citibank, CheckFree Corp., and S1 Corp. as the representatives of the financial services industry.
As a consolidator, BillingZone tries to group as many billers and payers under one network as it can. It is an application service provider, using the Web to give partner companies access to one another's invoices using BillingZone's servers.
Essentially, BillingZone faces the same challenges as aggregators in the consumer electronic bill payment and presentment market experience: It needs to sign up enough billers and payers for it to be worth anyone's while.
In an interview this summer, chief executive Eric Smith declined to discuss specifics about the company's revenues. He said BillingZone had more transactions and revenues in the first quarter of this year than in all of 2001, though it was not yet profitable, nor had it planned to be by that time.
Gerard Cassidy, an analyst at RBC Capital Markets, said that since entering the formal agreement with regulators in July, senior managers have "had to take their eye off their day-to-day business." That showed in the third quarter, he said; the company reported that profits rose 15% from a year earlier, to $285 million, but at $1 per share missed the consensus estimate by 4 cents.
"You've got a management team that's trying to run the business and at the same time handle a formal agreement with the regulators, which is a very serious thing," Mr. Cassidy said. "It showed up here in the quarter. Obviously they didn't do it."
But now with most of the issues behind the company, at least some observers say PNC can put its focus back on running the business.
Michael Mayo, an analyst with Prudential Securities Inc. and a critic of PNC, upgraded the company's shares from "sell" to "hold" on Tuesday. Mr. Mayo said that his firm's short-term earnings concerns were realized in the third quarter, and that while PNC's operating leverage "was the worst among the large banks," he expects problems to decelerate.
In addition, Mr. Mayo said, William Demchak, PNC's new chief financial officer, "seems focused on getting expenses under control" and improving the company's management.
